How to profit from the coming fiasco in solar power

By Dan Nygren

The late (and extremely prolific) author Isaac Asimov created a fictional scientific specialty called “psychohistory” that he used as a plot device in some of his novels. Psychohistory was able to predict the course of history given an extremely large number of individuals, and given the individuals of this group did not know what the future prediction was.

There are some non-fiction parallels to this in investing. The prime factor in the investing success of those who made huge profit on the bursting of the mortgage bubble was that very few people saw the bubble and its consequences, and even fewer with this knowledge knew how and had the means to profit from it. Michael Lewis’ book “The Big Short” gives a riveting account of this.

What I’m trying to say here is any well advertised and heeded method of generating profits cannot exist. By definition, if everyone knows about it and is acting upon it, there is no profit left to be made. Don’t confuse this with the efficient market hypothesis, what I’m saying is if an overvalued or undervalued investment is identified and enough people know about it for enough time, it will no longer be profitable. There still are countless veins of precious ore remaining to be found, just this particular one is played out and no longer of value to latecomers.

What we can do is find a general area of investment interest, and if we’re not too specific, you can do the remaining work and find an area where you can profit. Let’s aim big: Where can we find the next bubble? To find bubbles, I’m going to start by looking for government subsidies. In the news recently has been high profile case of a solar energy company going bust. Let’s discard the specifics of this company’s technology and management and look at solar energy in general.

There are many ways of using solar energy to efficiently produce power, but photovoltaic cells (the most common type of residential and small industrial solar electric installation) isn’t one of them. A rough example of what I’m talking about would be if you buy a photovoltaic solar panel for $10,000 , over the life of the panel, you may perhaps get $8,000 of electricity out of it. As money has a time value to it, you are losing more than just $2,000. It sounds crazy that anyone would buy a photovoltaic solar panel unless they lived off the power grid, as it would be both a money losing proposition and they have a better alternative to get electricity from the grid. Buyers don’t lose money, or don’t lose too much because the solar panels are subsidized. State, local, or national governments either subsidize the purchase of photovoltaic solar panels, or require power companies to force their rate payers to do so.

In essence every photovoltaic solar panel destroys energy. What do you call an energy source that doesn’t produce more power (produce more dollars) than it consumes? Well you don’t call it a power source. That governments have mandated that by a certain deadline a certain amount of power be generated by something that produces a net power loss should be very troubling. There are parallels here to the government mandating that mortgages be given to people who can’t pay them back. New home buyers are even being encouraged to roll the price of solar panels into the mortgage of their homes.

How do you profit from this coming fiasco? First, don’t lose money. Don’t buy photovoltaic solar panels. Also stay away from producers of these panels, because without subsidies, the product won’t sell. Power companies may be at risk if they haven’t hedged this exposure to negative sources of power.

Municipalities that have these mandates will have much higher power prices and therefore have their economic development reduced because of it, so avoid power intensive businesses located in regions that mandate solar power. As explained earlier, profiting is harder and best left to you. Perhaps looking at power companies close to areas that have solar mandates, but don’t have mandates themselves is a starting point. When the inevitable occurs, they will be able to buy low and sell high which should be the objective of every investor, especially psychoinvestors.

Story Conversation

About The Next Great Investing Columnist

MarketWatch is looking for the next great investing columnist, and running a competition to find the perfect person. The winner will receive a freelance contract to write for MarketWatch for a specified period of time. To check out the survivors’ posts and vote on them, visit our main contest page here.